Dear Mr Wolf… Reflections for the Magic Mountain

Can Davos 2012 offer real alternatives or will it serve up a smiling, gritted-teeth espousal that ‘business as usual’ can and should be sustained?

The Davos countdown has begun, as some
of the world’s most powerful embark on the ritual trek up the Magic Mountain.
What should be expected from this glitzy, snowy, global dialogue in this Year of
Unreasonableness? The Davos headline for this year is The
Great Transformation,“…an
indisputable leadership challenge that ultimately requires new models, bold
ideas and personal courage to ensure that this century improves the human
condition rather than capping its potential”. But can Davos offer real
alternatives or will it serve up a smiling, gritted-teeth espousal that
‘business as usual’ can and should be sustained?

Martin Wolf, the FT’s economics supremo,
has tried to meet expectations in his article on 7
Ways to Fix the System’s Flaws. Sadly, however, he has wasted a great
opportunity in clothing a softly-softly approach in the claim to be addressing
‘capitalism in crisis’. Fixing finance, the elephant in the room, needs in his
view higher capital ratios, stronger oversight, and smarter consumers. Whilst
no one would disagree with such common sense advice, there are equally few who
would agree that these actions will fix the problem. They leave in play
perverse incentives, conflicts of interest and the entire, under-regulated
shadow banking system that is busy repeating yesterday’s profitable errors. Mr
Wolf’s solution to inequality is equally laudable, large-scale fiscal
redistribution and investment in education for the poor. But does such
fashionable moral Keynsianism, echoing the best of Victoriana, really address
the economics of inequality; how best to change a system that is increasingly
delivering winner-takes-all outcomes?

Mr Wolf agrees that problems with power
and accountability lie at the heart of our broken economic system in
highlighting the need for changes in corporate governance and the corporate
financing of politicians and their parties. But again, his solutions seem at
best partial. Limiting direct financing of politicians is a great idea, as would
making public finance available for our noble representatives in their struggle
to be elected. But how does he propose to get these turkeys to vote for
Christmas? And does he really believe that closing the front door to political
financing will shut down an activity that some estimate to be the most
profitable game in town. And similarly for corporate governance. Mr Wolf
declares the ‘corporation’, by which one must assume he means the Anglo-Saxon
approach to running business, as the best we have and as good as it gets.
Improvements, he pleads, need intelligent, well-informed board directors,
greater transparency and no government intervention, (except for the banking
system). Yet few believe that any but
deeply involved (and therefore no longer) ‘non-executive’ directors can
understand the complexity of today’s corporate money-making moves. Any a
‘how-many-clicks’ map of today’s non-executive directors of the world’s
largest, listed companies highlight how small this club really is, and raises
doubts as to whether it can support any real challenges to ‘business as usual’.
Indeed, given the short-term interests of most investors, today’s dominant
fiduciary approach seems unlikely to deliver anything but trouble, including
lower financial returns.

Mr Wolf is one of my professional
heroes, fearless, smart and vocal. But although his solutions are sensible they
do not address the underlying problems.

Think first of all about what he has
left off the table. After decades of crusading anti-corruption measures, there
is little doubt that things are getting worse. And far from this being a
problem linked exclusively to emerging economies and businesses, we see an
ever-greater visibility of those on the take, flaunted cynically by politicians
and businesses, in countries with mature regulations and institutions that are
meant to provide oversight. Frankly, the main difference between corruption in
developed economies compared to weakly governed societies is that corruption in
the former has been legalised into super-profit taking, obscene remuneration,
laying-off risks on the poor, and systematic under-contributions of the rich
and profitable through the tax system. The inequality of outcomes identified by
Mr Wolf are the manifestations of these endemic features of our political and
economic system, and cannot be solved by calls for fiscal redistribution.

And what of the environment, Mr Wolf,
which you get around to mentioning three lines from the end of your article,
calling for “above all, protection of the environment”. Surely such
trivialization is not worthy of one of today’s most visible economists. The
problem here is not just that you have, or at least offer no clue as to what to
do about it. It is that you appear to see no links between the state of the economy
and the state of the natural ecology that sustains our lives on this planet.
The real problem with the financial markets is not that they are unstable and
liable to periodic implosion – it is that they are not doing their task of
investing our money in creating a resilient, sustainable economy that will
benefit current generations and those to come. Endemic short-termism is another
way of saying that investors are disinterested in what creates real value,
financial or otherwise, but have decided that competing with each other to make
money out of money is a simpler way to get rich. Even if you are unwilling to
value what cannot be monetised, take a look at how catastrophic last year was
for the insurance business because of natural disasters, or the speculation-driven
food price peaking just before the Egyptian revolution. Please, Mr Wolf, do not
relegate the environment to an after-thought to your ‘serious economic
analysis’.

Radical change rarely comes from the
mainstream. We know all about disruption when it comes to technology. CEO’s
nightmares are filled with unexpected enterprises that in short time suck the
value out of their incumbent businesses. But when it comes to institutions,
political systems, values and beliefs, most folks – especially economists –
turn their backs. Mr Wolf has under-played himself in doing the same. He does
of course mention the Occupy movement, but only in the context of a complaint
against inequality, not as a source or vector for economic innovation. Surely
the ‘financial
transactions tax’ is worthy of mention, not because he agrees with it
(which he certainly does not), but because it illustrates exactly the kind of
solution that we should be debating, inventing and advancing into practice. If
reform of corporate governance is part of the solution, why not consider the
value of a new generation of state-owned enterprises from China to Chile that
are entering the global economy with both profit and public interests in mind.
Or closer to home, why not consider the merits of the so-called B Corporations emerging in the US and
elsewhere as having fiduciary arrangements that allow for, indeed encourage,
financial and broader interests to be taken into account.

Political Economy 101 tells us that
change is unlikely to come from the dog that bit us in the first place, the
politicians, businesses and classes of people in whose interest it is to change
as little as possible. And that brings us back to Davos. Like capitalism, the
World Economic Forum has been hugely successful in reshaping its constituencies
and narrative to stay in the game. Thanks in no small part to the political
intuition of its founder, Klaus Schwab, the Forum has avoided becoming the
stranded asset that is the fate of most fashionable venues. Responding to
earlier anti-Davos sentiments, the Forum established a public forum that allows
the local community and global activists to voice alternative views whilst
remaining outside of the Forum. Furthermore, as its earlier constituencies aged
and perhaps got a little drab, the Forum created its own disruptors, social
entrepreneurs, young global leaders and technology pioneers just to name a few.
And this year, in response to the Occupy movement, Davos will sport yet another
class of internalized disruptors, the Global Shapers. It
is nothing short of genius, simple and effective.

Yet Davos does not seem to be able to
avoid the Orwellian-type edict that inclusion in an exclusive club eventually
makes for a room full of rather like-minded folks. Differences are carefully
socialised, and disruption frowned upon and a cause for the removal of club
privileges. This is not especially bad or mean, it is just the rule of all
clubs. There may well be an expert in B
Corporations at Davos, and there will certainly be folks who support the
financial transactions tax and see the power of state-owned enterprises to
improve the state of the world. There may even be the odd person on-site who
wants to discuss the role of resource nationalism, religious fundamentalism and
non-democratic political systems in saving us all. And to be fair, somewhere on
Davos-campus, perhaps in one of the smaller hotels up the hill, protected from
serious visitors and the media by distance, ice and a lack of prestige, some of
these discussions might actually, in fact almost certainly will, take place.
Yet these conversations are in Davos born to be marginalized, ridiculed, or
just ignored.

It is tough to seek to disrupt the lives and
livelihoods of one’s own members, sponsors and friends. That is certainly true
in Davos, but is also painfully true in the inner world of international NGOs,
or the bureaucracies of government and international organisations. Try
supporting nuclear in a Greenpeace meeting and see how far it gets you. But it
is disruption that is needed, of that there is no doubt. The Davos strapline,
the Great Transformation, is not conceivable without the Great Disruption, and
there are few if any incumbents that will welcome that. So Mr Wolf, thank you
for your proposed seven tasks and thank you for being a wonderfully erudite
economist and writer. But might I ask you to raise your ambitions, and those of
your readers, by applying yourself and risking more in setting out what needs
to be done to address the underlying problems of our time, and the fuller range
of possible measures for doing just that.

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